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Credit for Taxes Paid to Another State

To help prevent payment of taxes to multiple states on the same income, Virginia law provides a credit for taxes paid to another state. If any part of your Virginia taxable income is also taxed by another state, this credit may be available to you. To claim it, you will need to include the Schedule OSC and a copy of the return you filed with the other state with your Virginia income tax filing.

Residency and the credit

The guidelines for claiming the credit differ based on your residency. During the tax year for which you are claiming the credit, were you a resident, part-year resident, or a nonresident?

If you’re a Virginia resident, all of your income is subject to Virginia individual income tax, no matter where it was earned or what its source. If you received income from another state and were required to pay income taxes as a nonresident in that state, you may be eligible for a credit for the income taxes you paid to that state provided the income is also taxed by Virginia. If you earn income in a state that doesn’t have an income tax, you are not eligible for this credit on that income.

What income qualifies for the credit?

You can only claim the credit for income tax that you paid to another state on qualifying income which is:

earned income

business income

gain from the sale of any capital asset not used in a trade or business

Because your state withholding may differ from the taxes you actually owe the other state(s), you can’t use W-2s, 1099s, or Schedule K-1s to support a claim for this credit.

Special circumstances

Requirements for certain states

If you have income from Arizona, California, or Oregon sources, you can't claim a credit for taxes paid to those states on your Virginia income tax return. Claim a credit on the nonresident income tax return for the appropriate state.

If you are an owner or member of a pass-through entity with income from any of these states and you participate in the filing of a composite return, please consult Public Document 16-91.

If you have income from the District of Columbia and you meet the criteria for exemption from DC income tax under reciprocity provisions, you can’t claim this credit. If your employer withheld DC income tax from your wages, file the D-40B Nonresident Request for Refund to request a refund of the amount withheld.

If you earned wages or salaries in Kentucky and you commuted to your place of employment on a daily basis, that income should be exempt from Kentucky income tax. If your employer withheld Kentucky income tax in error, review the Kentucky nonresident income tax forms and instructions for refund procedures. If you were not a daily commuter, you may be eligible for a credit on your Virginia return for Kentucky income tax paid on qualifying income. Review both the Virginia resident and Kentucky nonresident forms and instructions to determine whether you are eligible.

If you earned wages or salaries in Maryland, Pennsylvania, or West Virginia and you were present in the other state for 183 days or less during the year, the income should be exempt from tax in that state. If your employer withheld income tax for the other state in error, review the state’s nonresident income tax forms and instructions for refund procedures.

Border states: If you’re required to file a return with Virginia and one of the border states (Kentucky, Maryland, North Carolina, or West Virginia), you may qualify for a special calculation of taxes owed if:

The taxable income from the other state is only wages, salaries, or business income from federal Schedule C that is taxed by the state, and

Your Virginia taxable income is at least equal to the qualifying taxable income on the other state’s return.

*When calculating income from a border state, don’t include income that is exempt from income tax in the border state, even if it is earned or business income from federal Schedule C. If you’re filing a joint return and each spouse filed a return separately in one of the border states, each spouse can use the border state computation to compute the credit.

Married Taxpayers

If you’re a married taxpayer and don’t file a joint return in Virginia and the other state, you may need to adjust your taxable income to compute the credit correctly.

If you filed separately in the other state, but jointly in Virginia, include only the Virginia taxable income earned by the filer whose income was taxed by the other state.

If you filed jointly in the other state, but separately in Virginia, include only the taxable income reported by the filer on the other state’s return.

If you and your spouse are included in the same composite return or are entitled to a credit for corporation income tax paid by an S Corporation in which you are both shareholders, you must each compute income and credits separately.

S-Corporations and Pass-Through Entities

Corporation income tax: If you are claiming a credit on corporation income tax paid to a state that doesn’t recognize the federal S Corporation election, attach a statement from the corporation that documents your share of the income, tax liability, and tax paid.

Pass-through entity composite returns: If you are an owner or shareholder in a pass-through entity, and you are included in a nonresident composite return filed by the pass-through entity in another state, attach a composite filing statement from the pass-through entity showing your inclusion in the filings as well as your share of the income, tax liability, and taxes paid. Preferred formatting for a composite filing statement.

Dual Residency

It is possible to be a resident of more than one state for tax purposes. For example, you may be a domiciliary (permanent) resident of one state, but live in another state long enough to be considered a resident there. This often happens in the case of students who are domiciled in one state, but attend school in another state for the entire academic year, or in the case of individuals who accept employment in another state. When this occurs, the individual has dual residency and will file a resident return in two states. In a case of dual residency, the state of domicile generally allows the credit, even if a credit for tax paid to the other state would normally be subject to reciprocity provisions.

If you're a part -year resident,you generally can’t claim a credit for taxes paid to another state, unless the other state’s income is received during your period of residency in Virginia. When you compute your Virginia taxable income, you will subtract any income that was received from another state outside your period of residency.

For example, if you lived in Virginia from June 12 through December 31 and received income in your prior state of residence from January 1 through June 11, you will subtract that income on your Virginia return. If you received income from another state on or after June 12, you may qualify for a credit on your Virginia return. See Residency Status for details. Generally you only pay tax on the income earned while you were in Virginia.

Because your state withholding may differ from the taxes you actually owe the other state(s), you can’t use W-2s, 1099s, or Schedule K-1s to support a claim for this credit.

Special circumstances

Requirements for certain states

If you have income from Arizona, California, or Oregon sources, you can't claim a credit for taxes paid to those states on your Virginia income tax return. Claim a credit on the nonresident income tax return for the appropriate state.

If you are an owner or member of a pass-through entity with income from any of these states and you participate in the filing of a composite return, please consult Public Document 16-91.

If you have income from the District of Columbia and you meet the criteria for exemption from DC income tax under reciprocity provisions, you can’t claim this credit. If your employer withheld DC income tax from your wages, file the D-40B Nonresident Request for Refund to request a refund of the amount withheld.

If you earned wages or salaries in Kentucky and you commuted to your place of employment on a daily basis, that income should be exempt from Kentucky income tax. If your employer withheld Kentucky income tax in error, review the Kentucky nonresident income tax forms and instructions for refund procedures. If you were not a daily commuter, you may be eligible for a credit on your Virginia return for Kentucky income tax paid on qualifying income. Review both the Virginia resident and Kentucky nonresident forms and instructions to determine whether you are eligible.

If you earned wages or salaries in Maryland, Pennsylvania, or West Virginia and you were present in the other state for 183 days or less during the year, the income should be exempt from tax in that state. If your employer withheld income tax for the other state in error, review the state’s nonresident income tax forms and instructions for refund procedures.

Border states: If you’re required to file a return with Virginia and one of the border states (Kentucky, Maryland, North Carolina, or West Virginia), you may qualify for a special calculation of taxes owed if:

The taxable income from the other state is only wages, salaries, or business income from federal Schedule C that is taxed by the state, and

Your Virginia taxable income is at least equal to the qualifying taxable income on the other state’s return.

*When calculating income from a border state, don’t include income that is exempt from income tax in the border state, even if it is earned or business income from federal Schedule C. If you’re filing a joint return and each spouse filed a return separately in one of the border states, each spouse can use the border state computation to compute the credit.

Married Taxpayers

If you’re a married taxpayer and don’t file a joint return in Virginia and the other state, you may need to adjust your taxable income to compute the credit correctly.

If you filed separately in the other state, but jointly in Virginia, include only the Virginia taxable income earned by the filer whose income was taxed by the other state.

If you filed jointly in the other state, but separately in Virginia, include only the taxable income reported by the filer on the other state’s return.

If you and your spouse are included in the same composite return or are entitled to a credit for corporation income tax paid by an S Corporation in which you are both shareholders, you must each compute income and credits separately.

S-Corporations and Pass-Through Entities

Corporation income tax: If you are claiming a credit on corporation income tax paid to a state that doesn’t recognize the federal S Corporation election, attach a statement from the corporation that documents your share of the income, tax liability, and tax paid.

Pass-through entity composite returns: If you are an owner or shareholder in a pass-through entity, and you are included in a nonresident composite return filed by the pass-through entity in another state, attach a composite filing statement from the pass-through entity showing your inclusion in the filings as well as your share of the income, tax liability, and taxes paid. Preferred formatting for a composite filing statement.

Dual Residency

It is possible to be a resident of more than one state for tax purposes. For example, you may be a domiciliary (permanent) resident of one state, but live in another state long enough to be considered a resident there. This often happens in the case of students who are domiciled in one state, but attend school in another state for the entire academic year, or in the case of individuals who accept employment in another state. When this occurs, the individual has dual residency and will file a resident return in two states. In a case of dual residency, the state of domicile generally allows the credit, even if a credit for tax paid to the other state would normally be subject to reciprocity provisions.